June 1, 2018 / 10:09 PM / 2 years ago

San Francisco Fed's Williams interview with Reuters

SAN FRANCISCO (Reuters) - San Francisco Federal Reserve Bank President John Williams sat down with Reuters on June 1, 2018 for his last interview before the U.S. central bank’s June policy-setting meeting, after which he will take the new role of New York Fed President.

Following are highlights from the interview. For the story please see

On the Fed’s rate-hike path:

My view is that the economic data continue to be very strong and show the economy on a good track. Inflation data have been consistent with our expectation that inflation would bounce back after last year and it’s getting very near our 2 percent goal. So given that the labour market’s strong, growth momentum is solid, and the inflation data is showing that we are getting very close to or near our inflation goal… we should continue the path that we are on, which is the gradual rate increases over the next two years….

It makes sense in that context of a strong economy to be, this idea of three to four rate increases in 2018, further rate increases in 2019, is still the right answer. We’ve had one rate increase obviously already this year, so between two and three more this year seems still consistent with achieving our goals.

On getting to a “neutral” policy setting:

I would think that three more rate increases, we would be right around my view of where neutral is. Looking at my colleagues, it might be another rate increase or so before we get to neutral in terms of the median projection. But definitely not that far away from where I view is a longer run estimate of a neutral interest rate. …. I do think this notion that monetary policy was by design trying to stimulate growth, beyond whatever else was happening, in the last many years, that notion that we are trying to stimulate growth to be beyond the longer run trend or the sustainable level, that is no longer the relevant context of thinking of monetary policy once we get close to or around neutral. …

“My view, as we get closer to around neutral, somewhere in the 2, 2.5 to 3 percent range – that’s when you really want to reset our thinking about the data dependence of monetary policy. That, as the economy evolves, we may need to raise interest rates or keep interest rates the same, or lower interest rates. We are kind of moving away from a phase of getting back to normal, to a phase of just normal monetary policy. Which is really about being data dependent.

I don’t see it necessarily as a pause or a need to reflect around neutral. ... What I mean by rethinking or communicating differently is we will get to a point in a not too distant future, whether it’s early next year or at some point, where interest rates are around neutral, in the vicinity of neutral and then… we are in a different stage…It’s not a change in strategy, it’s a change in where we are in the cycle. It’s a change in communication. It’s really not about normalizing policy anymore, it’s about getting the right policy given where the economy is....It could mean that interest rates go above neutral for a period of time, assuming the economy’s really strong and inflation is at or somewhat above our 2 percent goal.

“I don’t view our policy path as just getting to neutral and saying, ‘okay we’re done,’ I would say we’re done with getting the normalization. And then we’re moving to, well, how do we get to the right stance of policy given where the economy is and where it’s headed.

On changes to communication:

“In our current FOMC statement we have a number of sentences or ideas in there that relate to monetary policy either being accommodative or other things related to that, and I think as we move closer to that point where we are at or in the vicinity of neutral, that language is no longer either accurate or (b) is not really that useful in how to think about monetary policy going forward. ... As we get into a situation with unemployment below 4 percent, with inflation at 2 percent, then I think we just need to frame that where the economy is and how we are thinking about policy going forward a little bit differently. And when I say a little bit differently I mean less forward guidance in the language, less language about where we see policy moving, not necessarily no language about it, but less language about it. And more, I think, just trying to express as effectively as possible our views on the economic outlook, how policy fits into that economic outlook, and then use the quarterly economic projections, along with obviously the dot plots, to help put some numbers and some facts and figures that kind of fit in with those statements….

“What we should be explaining to people as much as we can is our reaction function, helping people to understand how monetary policy responds to the changing economic outlook in the context of our dual mandate goals. Trying to put that into words… sometimes just is hard to do and not that effective.

What about “gradual” rate hikes?

“I think the word gradual is accurate now... I don’t see this in any way stale in terms of my outlook for the economy...at some point as we move back to normal... then it won’t make sense...One of the signs of success of where the economy is and where policy is, is that these (words) are going to become artefacts of that process of getting us there.”

Reporting by Ann Saphir

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